This heavily builds on the assumption that aluminum inventories will be zero by that time, which depends on a successful implementation of the international Memorandum of Understanding. Historically these non-binding agreements have been very hard to enforce, and so a scenario where supply is far greater than demand is likely, leading to large inventories and lower prices. It is because of this uncertainty that we recommend you do not build the plant. Back-up calculations:
1.ROI calculation: Given investment costs of $1.6bn, full capacity of 466,000 t/year and an ROI requirement of 15%, we calculated that you require a price of $1,500 per ton of aluminum.
2.In the short run, all smelters need to cover variable costs, which include electricity, alumina, other material costs and freight cost. In the long-run, they need to cover total costs. a.The current price ($1,100) covers variable costs for 20 million tons of capacity; the long-run price will have to be higher. b.Smelters may hesitate to scale down production of individual pots, as this will still incur costs of labour or other non-material costs, as well as additional costs in having to rebuild and reline the pots. c.Not all producers are subject to the same pressures, e.g., variable costs differ significantly between different smelters (different size, efficiency, tax breaks, power agreements). Government-run facilities may have more financial support due to their social role in addition to pure production, such as securing raw materials supply for domestic industries, as well as providing jobs for local communities.
3.Given a CAGR of 2% per year, we estimate total aluminum demand to be 27 million tons in 1998. Assuming that inventories are zero, and primary demand accounts for 74% of total supply, this would imply primary demand of 20 million tons.
4.To produce 20 million tons, the price would be around $1,490 per ton. 5.The reduction in inventories and stabilization of the price level depends on the success of the MoU. Other producers may not look favorably on you opening a new smelter when they have had to cut down on production.